Maybe There’s No Recession After All…
05 August 2022
Hi, The Investor’s Podcast Network Community!
It’s Friday!
What a perfect day to welcome you back to We Study Markets!
Before you turn on those beautiful OOTO automatic email responses, let’s discuss the most important things happening now in markets.
At 8:30am EST this morning, the U.S. Department of Labor’s July jobs report came out, and boy was it full of surprises.
It appears last month that the U.S. added 528,000 jobs, which is more than twice what analysts expected, and a strong data point for those who believe the economy can avoid a harsh downturn.
During a recession, you would not normally expect the unemployment rate to continue ticking down and to have booming job growth, but that appears to be what’s happening right now.
Maybe employers just haven’t gotten the word yet that they’re supposed to be laying people off? 🤔 We’ve got the full scoop below.
🛢️ Oil prices are down below $90 for the first time in months, and gasoline prices have fallen for over 50 straight days.
This is great for our wallets and a sign that inflation may start to cool as well, but it’s too soon to celebrate just yet.
Energy markets remain incredibly tight, and it will be some time before supply and demand mismatches are corrected broadly. Until then, expect more volatility ahead.
In other news, Bitcoin is coming to BlackRock via Coinbase, and Coinbase shareholders couldn’t be happier about the partnership. The stock popped yesterday – more on this below.
*Equities as of 4pm EST on prior day’s close. Bitcoin, bond, and oil prices as of this morning
Today, we’ll discuss why anyone would ever want to own an ETF that tracks just a single stock, July’s jobs report, Australia’s brutal truth for central banks, and Smokey the Bear’s advice for your portfolio.
All this, and more, in just 5 minutes to read.
Let’s do it!
IN THE NEWS
🛎️ Coinbase Announces Partnership with BlackRock (CNBC)
Explained:
- BlackRock, the world’s largest asset manager with $10 trillion in assets under management (AUM), is launching bitcoin trading services for its institutional clients in a new partnership with Coinbase. BlackRock said, “Our institutional clients are increasingly interested in gaining exposure to digital asset markets and are focused on how to efficiently manage the operational lifecycle of these assets.”
- Coinbase shares climbed 10% Thursday, but had jumped as much as 40% at one point. The shares are down nearly 70% for the year. 22% of available Coinbase shares are being sold short which can add to big upward stock movements as shorts suddenly have to cover their positions (buy more stock).
What to know:
- BlackRock indicated in February they wanted to enter the bitcoin ecosystem, partly due to investor interest, but also due to the increasing flows of capital into the space that could add to their bottom line. Coinbase will leverage its institutional brokerage platform, Coinbase Prime, to provide BlackRock clients direct access to bitcoin trading and custody.
- Many investors maintain that institutional adoption is key to increasing the maturation, stability, and price of bitcoin. The announcement by BlackRock should prove to be a boon for the price of bitcoin which is down 51% year-to-date.
🔨 U.S. Economy Added 528,000 Jobs in July (WSJ)
Explained:
- According to the Labor Department, the U.S. economy added a “robust” 528,000 new jobs in July, returning payrolls to their pre-pandemic level. A gain of 250,000 new jobs was expected last month, and the unemployment rate has now dropped to 3.5%.
- Total job openings remain well above the number of unemployed workers looking for a job. Demand for workers is still high in sectors that haven’t fully recovered from Covid-19, including education, healthcare, leisure, and hospitality.
What to know:
- Businesses continue to hire despite two consecutive quarters of economic contraction, a slowdown in consumer spending, and the rising risks of recession.
- The average monthly gain in jobs has been 456,000 this year. A more sustainable pace of employment growth is part of the Fed’s game plan to extinguish high inflation without completely upending employment or triggering a recession. The prospect of a soft landing looks a little brighter.
🇦🇺 Central Banks Globally Nervously Watch Australia (FT)
Explained:
- While central banks all over the world spent much of last year trying to downplay inflation risks despite offering ultra-loose and highly accommodative monetary policy to stimulate an economic recovery, Australia’s central bank has been much blunter about its role in 2022’s rapid rise in inflation. The bank’s governor was quoted as saying, “We should (have) forecast this better. We didn’t.”
- Australia’s Treasury has taken steps to appoint an independent team to objectively determine just how much the central bank’s admittedly flawed policies contributed to the country’s inflationary problems.
- However, the Reserve Bank of Australia (RBA) stuck to precedent set by central banks globally much of last year, so the ramifications of this independent review may highlight policy problems far beyond the Land Down Under.
What to know:
- Recently, the Bank of England issued a blistering warning that the country faces a deep recession later this year, though further interest rate increases will be necessary to bring down rampant inflation.
- The UK is not the only country in this situation, and central banks have broadly painted themselves into a corner, where they must balance reducing inflation with inflicting harsh economic decline.
- Many central banks proudly stand by their independence and necessary cushioning from whimsical political pressures, but in light of the sizable policy errors from underestimating inflation risks, these same banks must justify their actions. Following this review of the RBA, it may be much harder for them to plead innocence.
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DIVE DEEPER: THE ERA OF SINGLE-STOCK ETFS
This week, we listened to a Bloomberg Podcast talking about the future of ETFs based on individual stocks. Yes, that’s right. One ETF for one stock.
If you’re wondering why on earth anyone would use a financial instrument such as an ETF, which is generally known for enabling investors to diversify across a number of financial assets in one product, would do such a thing, then you’re not alone.
We learned, though, that these products do actually serve a legitimate and practical purpose.
For particularly adventurous but non-professional investors, navigating the world of options, margin, and short selling can be restrictive, costly (both from fees and losses), and simply hard to understand.
The beauty of single-stock ETFs then is that for those who want to make specific, and speculative bets, using leverage to magnify returns or going short can be simplified into a corresponding ETF product.
While these sorts of strategies have been around in Europe, the SEC in July approved the first ETFs devoted to tracking individual stocks.
What to know
Of course, they aren’t simply just owning the stock within an ETF, because why would anyone pay fees to own an individual stock they could just buy themselves?
Rather, these funds from AXS Investments enable traders to make short-term bets on stocks without the hassle of derivatives and margin loans from their brokers.
The most successful one so far appears to be ticker: TSLQ, which is an inverse Tesla ETF. If you’re particularly bearish on Elon Musk and Tesla, this product enables you to more easily profit from declines in the stock’s share price.
Other examples of single-stock ETFs from ASX include a leveraged 1.25x Nvidia ETF (ticker: NVDS), a 1.5x PayPal ETF (ticker: PYPT), alongside bearish products for going short like a 2x inverse Nike ETF (NKEQ) and a 2x inverse Pfizer ETF (ticker: PFES).
On a daily basis, these serve to magnify a stock’s price movement in a given direction. So if Nvidia’s stock rose 1% in a day, then NVDS should return approximately 1.25%.
This also magnifies the downside as well though which introduces a tremendous amount of volatility into one’s portfolio. This risk is even greater for the more highly leveraged 1.5x or 2x products.
So What?
These products are by definition not intended for long-term ownership.
While the goal is to return a leveraged and/or inverse return of a stock based on its movement each day, there are significant compounding risks that such strategies are vulnerable to over time.
One issue is that given the high management fees and derivative costs associated with these funds, seemingly small differences in daily performance relative to the benchmark can create huge tracking errors over months and years that distort returns.
Other risks like lack of liquidity or high volatility in the underlying stock and derivatives can further distort expected returns.
Basically, these are highly speculative and risky products, and there are serious questions as to whether they should even have been approved by the SEC.
That said, this is likely to unleash a new era of single-stock ETFs that cater to retail investors in allowing them to make bets on daily stock movements that would have been otherwise difficult or impossible to execute.
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QUOTE OF THE DAY
“Investors can survive a bear market the same way hikers survive a run-in with a bear: Remain calm and don’t make sudden moves.”
The past month has given a little optimism for investors, as the S&P 500 has climbed 8.37%, clawing back some of the first half of the year’s losses. Year-to-date, though, the index is down 13.44%.
Some analysts are calling this a bear market rally and expect further declines in the equity markets. It’s tough to say, but with the Federal Reserve intent on taming inflation through raising rates, it’s hard to advocate for fighting the Fed.
We certainly hope the market continues to advance, but it may be prudent to think how you would react if the bear market does come roaring back.
As Mr. Zweig says, the National Park Service’s advisory on how to behave if you come across a bear in the woods is a very useful guide for investors as well. They say to hike and travel in groups…because of their size, groups are intimidating to bears.
Takeaway
You can’t scare away a bear market by grouping with other investors, but you can lower your cortisol levels by tuning out toxic influences urging you to trade, time the market, or make sudden shifts in strategy.
Screen out the commentators who don’t look beyond this week’s headlines and huddle with other investors that focus on the long term.
To paraphrase Smokey the Bear, only you can prevent a forest fire to your portfolio.
Check out more from Jason Zweig in his outstanding interview with William Green on Richer, Wiser, Happier here.
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SEE YOU NEXT TIME!
That’s it for today on We Study Markets!
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